It looks like the strength in the euro could be here to stay as traders increase their bullish bets on the currency.
Research by John Higgins at Capital Economics shows that non-commercial futures positioning for the euro turned positive in May for the first time in three years.
Non-commercial positions are based on trading activity, as opposed to currency hedges used by individual businesses.
Higgins said that although net-positive positioning in the euro has historically been a catalyst for it to fall in value, that’s unlikely to happen this time.
This chart shows the recent change:
The positive speculation has helped fuel strength in the euro, from around $US1.05 at the start of the year to a recent push above $US1.14.
Higgins also noted that value of the euro, relative to its US counterpart, is coming off a low base.
The euro’s current price of around $US1.13 is still significantly lower than levels of around $US1.40 that it traded at in 2014.
Higgins cited the prevailing sentiment in markets recently, which is that the Eurozone economy has stabilised and is finally on track for future growth.
That makes the currency less susceptible to conditions which led to the previous three falls in the currency’s value since 2009.
“In the first case, this reflected broad-based worries about the health of the region’s public finances and banking system, while in the second and third cases, they were mainly related to flare-ups of the crisis in Greece,” Higgins said.
Although Greece’s economy is still shaky, the Greek stock market is up 25% this year as markets are increasingly confident that it will be able to roll over its debt obligations later this month.
Lastly, Higgins said that previous euro weakness against the greenback was also driven by interest rate conditions which were more supportive of the US dollar.
Although Capital Economics expects the US Federal Reserve will continue raising rates ahead of market expectations, a reversal of the European Central Bank’s accommodative stance may also be forthcoming.
“We think that relative interest rate expectations will actually start to become more supportive for the euro in 2018,” Higgins said.
Looking further ahead, Capital Economics forecasts that the euro will edge back towards $US1.10 later this year, before tracking higher to $US1.20 by 2019.
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